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FT REPORT – ENERGY IN THE AMERICAS: Alberta oilsands frenzy slows to a more sustainable pace

By Bernard Simon in Toronto, Financial Times
Published: May 08, 2007

The mood in Canada’s oilsands is less celebratory than one might expect from an industry in the throes of north America’s biggest resources boom since the Klondike gold rush more than a century ago.

The bitumen-like oilsands deposits, located in north-eastern Alberta, have attracted investors, big and small, from around the world. By last year, the oilsands contributed 46 per cent of Canada’s crude oil output, nearly double their share a decade earlier.

According to the Canadian Association of Petroleum Producers, new projects valued at C$65bn are on the cards for the period between 2006 and 2011, rising to C$82bn by 2016.

The industry has become a locomotive for the Canadian economy, drawing in thousands of workers and equipment suppliers from less fortunate parts of the country, and boosting exports.

“There is no question that oilsands are a unique resource and one that is growing in strategic importance”, says Andrew Potter, an analyst at UBS in Calgary. “There is also no question that Canadian oilsands plays offer compelling long-term value if oil prices remain above US$50 a barrel”.

However, Mr Potter concludes: “This compelling investment thesis is beginning to be overshadowed by major risks.”

One is the recent yo-yo in oil prices. “With it backing off the highs to some degree it’s had a bit of a dampening effect”, says Bill Sembo, vice-chairman of RBC Capital Markets, a unit of Royal Bank of Canada.

The more sombre mood was evident in Calgary-based Petro-Canada’s decision in March to shelve plans for the sale of five oilsands leases.

Petro-Canada said that bidders had failed to meet its expectations. “We would consider selling these properties in the future – if the price is right”, it added.

In other respects, the oilsands are turning into too much of a good thing. The frenetic pace of development around Fort McMurray, the main oilsands centre, has become a big concern among city officials, environmentalists and even the oil companies themselves.

A recent Alberta government report points to a long list of overstrained services, and says the “severe housing shortage needs to be addressed on an urgent basis”. The average price of a house in Fort McMurray (population 65,000) soared to C$484,000 by late last year, well above prices in Canada’s major cities.

Environmental groups have become increasingly vocal about the pace of oilsands expansion.

The Pembina Institute, based in Edmonton, called on regulators in early April to freeze approvals for new projects and lease sales.

Critics put much of the blame for these strains on a generous tax regime set up to encourage investment when crude prices were far lower and the viability of the oilsands was in doubt.

The Alberta provincial government levies a royalty of just one per cent of gross revenues on production until a project is profitable and all costs have been recouped. The subsequent rate of 25 per cent of net revenues is lower than for conventional oil and gas fields.

The federal government has sweetened the pot by allowing oilsands operators to write off their entire investment for tax purposes, against 25 per cent for conventional oil properties.

Both levels of government are now having second thoughts.

“We need to be certain that the royalty regime is providing Albertans with a fair return on the province’s natural resources while maintaining an internationally competitive system”, says Lyle Oberg, the province’s finance minister.

The federal government announced in its March budget that the accelerated capital cost allowance for oilsands producers would be phased out.

The blow has been softened by a long lead time. The normal capital cost allowance rate will not apply until 2015 on projects which have been approved but not yet started.

Mr Sembo says the industry is now going through a process of “natural maturation” with the reins increasingly held by “those who have the capacity to stay the course”.

For example, Royal Dutch Shell recently bought out minority shareholders in Shell Canada with a view to integrating the Calgary-based unit more closely into its global operations.

Statoil, the Norwegian oil and gas company, agreed a $2bn offer for privately held North American Oil Sands, whose shareholders include the Ontario Teachers’ Pension Plan, late last month.

Day-to-day management of Syncrude, one of the oldest and biggest producers, is increasingly being taken over by Imperial Oil, ExxonMobil’s Canadian subsidiary, which is also a shareholder.

“There’s a recognition that you need to have the capacity to deal with the ultimate market for your products”, Mr Sembo says. He adds that “the market has become a little more discerning in the treatment of organisations”, with banks and other lenders gravitating towards players with the strongest balance sheets.

In other words, even in the booming oilsands, wheat is gradually being separated from chaff. and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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